Episode 768: A Chat With Ben Bernanke

Today on the show, we sit down with Dr. Ben Bernanke, the medicine man of the markets and the money supply.

Ten years later, we're still dealing with the effects of the 2008 financial crisis. Some industries and parts of the country are still trying to recover from the worst economic period since the Great Depression.

It was Ben Bernanke's job to stop the crashing and pick up the pieces.

As chairman of the Federal Reserve, he had to balance the pressures of Congress, the White House, and the American people and come up with a solution to rebuild confidence in the country's financial system. He had to make tough call after tough call.

He's had 10 years to think it over on what happened, what could have happened and why. So, we sat down with him to ask a few questions, like:

The financial crisis was the biggest economic event we will see in our lifetimes - at least let's hope it is. And it's not entirely over. I mean, every day we are still dealing with the aftermath of it as a country. And there are still so many questions that I have about why the financial crisis happened, the ways in which we responded to it, what the consequences still might be. And there is only one person in the world really who can answer these questions.

BEN BERNANKE: Hi, this is Ben Bernanke, and I'm glad to be here.

VANEK SMITH: Ben Bernanke, the former chairman of the Federal Reserve. When the whole economy was falling apart, Ben Bernanke was the man who had to steer the ship. His book, "The Courage To Act," is out in paperback this week. It's a journey through the whole financial crisis, all of the major events and causes. You should check it out. It's an amazing book to read. And we brought Ben Bernanke here to ask him some of the questions that we still have about the financial crisis. Hello and welcome to PLANET MONEY. I'm Stacey Vanek Smith. Today on the show we talk to Ben Bernanke.

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VANEK SMITH: There is a question I have always wanted to ask Ben Bernanke. He left Princeton to go to the Federal Reserve in 2002, worked under then Chairman Alan Greenspan, and became the chairman of the Fed himself in 2006 at the height of the housing bubble. Bernanke was a really well-known scholar of the Great Depression. In fact, his studies informed a lot of the ways in which he responded to the financial crisis. But there's something I've always wondered.

You are a scholar of the Great Depression, certainly very in tune with this stuff. It seemed like you were in the right place at the right time. Why didn't you see this coming?

BERNANKE: Well, in many ways, the financial crisis was a standard financial panic. What a financial panic is is a situation where people lose confidence in, say, the banking system or the financial system generally and they start pulling out their deposits from the banking system, for example. And that's a traditional problem in the...

VANEK SMITH: Bank run.

BERNANKE: Bank runs, exactly. We thought - and I say we, I mean basically everybody thought - that that wasn't going to happen again because in particular bank deposits are insured and so people don't have any incentive to go run, pull their money out of banks when they lose confidence in the banks. That was wrong. And when things got bad enough and prices of all assets were collapsing and nobody wanted to hold even very, you know, safe assets or other than the most safe, then we had runs.

And they were, again, conceptually very similar to the bank runs of the 19th century or the 1930s. But instead of it being people lining up to take their deposits out of the banks, it was electronic runs. So the panic phenomenon was very much part of this. And once the panic got out of control, then everybody is hunkering down or selling assets as quickly as they can and the financial system comes to the brink of collapse.

So we did understand that there were problems in the subprime mortgage market and those sorts of things. What we did not see was that it could turn into a broad based panic where everyone was losing confidence in the financial system and trying to pull their money out as fast as possible. We didn't see that coming.

VANEK SMITH: I mean, there was always this mystery around why the banks were bailed out rather than the homeowners. Like, why was it the right move to bail out the banks?

BERNANKE: Our view was that, you know, the financial system collapses, the economy collapses. And we needed to stabilize the banks in order to get the system - the financial system stable. And then that would lead us to a situation where we could help the economy recover. And I think that was true. At least, you know, once the crisis began, once we began to see the problems emerging, at least we had a strategy. And the strategy was the central banks for 300 years have been the so-called lender of last resort. They're there to provide **********

VANEK SMITH: Yeah, people who'd taken - irresponsibly taken out loans.

BERNANKE: Yeah, and that was the image. And as a result, it was actually very unpopular. And Congress put a lot of restrictions on what the Treasury could do. And you know, it's just simply not the case that Treasury ignored homeowners. They tried very hard. And every time I would go, for whatever reason, to the White House - at that time, President Obama would say, well, what are we doing for homeowners? It was just a tough - a tough challenge, particularly, again, since Congress had put significant limitations on how money could be used.

VANEK SMITH: How bad could it have gotten? That was something I always wondered.

BERNANKE: Well, it's hard to know. But the Council of Economic Advisers in the - in the White House did an analysis of the behavior of the U.S. economy in the months after Lehman Brothers and compared it to 1929, 1930, 1931. And 2008 was worse. I feel...

VANEK SMITH: By a lot?

BERNANKE: Meaningfully worse than 1929 in terms of the decline in employment, decline in industrial production and so on. So it's hard to know. And I often say, well, suppose it was only a 25 percent chance of another Great Depression. Would you have acted then? I think I - I think there's a case that even if you weren't certain that you wanted to avoid that risk.

But to be honest with you, I mean, I was one of the people - when I went to Congress in the fall of 2008 and said, look, we've got to do something because if the financial system collapses, the rest of the economy is going to come down with it, I was one of the people who was most pessimistic about what the effects might be on the U.S. economy. I was not pessimistic enough. It fell. The economy collapsed even more quickly than I was fearing, and the response was really dramatic.

VANEK SMITH: So I mean I remember when the Dow Jones got down to 6,000s. I remember at one point the thought going through my mind, like, I wonder if the markets can actually go to zero? They'd lost 6,000 points. There were only 6,000 points left. And I remember feeling like it was such a - such a kind of dark, really frightening time because it really sort of felt like things were falling apart. What was it like for you during that time just, like, getting up every morning and going to work?

BERNANKE: Well, it was a very - it was a scary time.

VANEK SMITH: Yeah.

BERNANKE: Of course the stock market wasn't going to go to zero. It didn't go to zero even in the Great Depression.

VANEK SMITH: That's true.

BERNANKE: But - but the...

VANEK SMITH: But it seemed (laughter) - it seemed possible there for a while.

BERNANKE: But the economy was in freefall, as I mentioned, and the - who knew what the bottom was of that? But once we had a plan - we had a general strategy - my focus was - I mean, psychologically, my focus was - what do I have to do today? What do we have to accomplish today? What are the next steps?

VANEK SMITH: Like, a one day at a time...

BERNANKE: One-day-at-a-time strategy.

VANEK SMITH: Yeah.

BERNANKE: I knew if I tried looking ahead too far, it would just - you know, too much uncertainty. But, you know, really taking it one step at a time to get us back to a more stable situation.

VANEK SMITH: Did you stick to your normal routine then? Or did you...

BERNANKE: Well, there were some periods during the - particularly during the height of the crisis when I would sleep on my sofa in my office

VANEK SMITH: In your office.

BERNANKE: You know, there were some weekends where we were dealing with a big firm that was in serious trouble, and there would be conference calls all night and trying to figure out, you know, what we could do. And we only had so many hours. The...

VANEK SMITH: What did you eat at that time?

BERNANKE: A lot of junk - you know, pizza, that kind of thing, you know. But...

VANEK SMITH: Yeah, no. I mean, I remember just, at that time, feeling like the whole country was kind of looking at you. You were like the country's therapist for a...

BERNANKE: Not willingly, no.

VANEK SMITH: (Laughter) But there was also a lot of dramatic stuff happening.

BERNANKE: Right. Well, the drama was not entirely without purpose. Part of this is psychological, and you want to get people more confident, and they want to believe that the Fed is taking action needed to get our economy back on track. And so I think that part was important too. And...

VANEK SMITH: Just, like, the theater of it?

BERNANKE: There was some theater to it. I once said that central banking monetary policy is 98 percent talking, 2 percent action.

VANEK SMITH: Like, 90 percent of the job is that?

BERNANKE: A lot of it.

VANEK SMITH: Is that true?

BERNANKE: Yeah. A lot of it is - a lot of it is about convincing people that you'll do what you say you're going to do and that you'll take whatever steps are necessary.

VANEK SMITH: One thing I also wanted to ask about was was all the Senate testimony that you had to give. One of the lines of questioning that I remembered that stuck out in my head was from Ron Paul. I pulled a clip. If you don't mind, we can just play it.

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RON PAUL: And history's against you. I mean, history is on the side of hard money. If you look at stable prices, you have to look to the only historic sound money that's lasted more than a few years. Fiat money always ends. Gold is the only thing where you can get stable prices.

BERNANKE: Now, you're correct that there are relationships, obviously, between the dollar and domestic inflation and the relationships between the money supply and domestic inflation. But those are not perfect relationships. They're not exact relationships. And given a choice, we have to look at the inflation rate, the domestic inflation rate. Now, I understand that you would like to see a gold standard, for example, but that is really something for Congress.

VANEK SMITH: Those seemed painful.

BERNANKE: They were fairly painful for both good and bad reasons. And the bad reasons was I think there was some unwarranted antagonism in part, at least some members of Congress. But on the other hand, it was also the case that, you know, people were very concerned about what was happening - what was happening to the economy, what was happening - what the Fed was doing. And it was my job - it wasn't always the most pleasant thing in the world - but it was an important part of my job to explain to members of Congress - and through them to the public and media and the markets - what we were doing, why we were doing it and how we saw things unfolding.

I testified before either the House or the Senate something like 80 times when I was...

VANEK SMITH: Oh, my gosh.

BERNANKE: ...When I was chairman. I had to try to remain calm. And certainly, part of the job is to project calm and make people feel more confident about what you're trying to do.

So we would - first, there would always be written testimony which would sort of lay out the main points I wanted to make. And so that had to be written. And lot of consultation with staff and a lot of discussing about every word that goes into those because there's always...

VANEK SMITH: I remember at one point you guys have a meeting that goes for half a day over the word predominantly. Is that right?

BERNANKE: Well...

VANEK SMITH: It was, like, one word that took...

BERNANKE: That's a little - that's a slight exaggeration. But we did often sweat the details in terms of which word we were using because markets would say - oh, they say the economy is growing moderately rather than modestly. That must mean X, Y and Z. And so...

VANEK SMITH: Sell (laughter).

BERNANKE: Yeah, sell. Bye. Sell.

VANEK SMITH: (Laughter).

BERNANKE: So it was important to try to get the wording as accurate as possible. And, you know, people say that the Fed speeches can be kind of stiff and kind of formulaic. And there's a reason for that, which is that, you know, there's communication going on in terms of exactly how the issues are laid out and the kinds of words we use and so on.

VANEK SMITH: Yeah. I remember at one point, you say that you're in a meeting at the Fed. And you sort of offhandedly ask almost a rhetorical question. And I think later in the day, you get, like, a presentation with a bibliography and everything answering your like...

BERNANKE: This was before I was chairman. This was when I was just a governor on the board, and there was a presentation by the staff. And I was used to being an academic before that and, you know. And...

VANEK SMITH: (Laughter) Just, like, posing...

BERNANKE: In a seminar, you always pose some hypothetical question just to cause trouble. And so I posed a hypothetical question, and I didn't realize that the Fed staff would put tremendous effort into actually answering the question.

VANEK SMITH: (Laughter) Go, go, go.

BERNANKE: After that, I tried to be much more careful and - when I posed a hypothetical (unintelligible).

BERNANKE: But also - it also - I mean, one of the real privileges of being Fed chairman or on the Fed board is that the staff are so strong. I had - when I came there at the Fed in 2002 direct from Princeton, I had about 10 former students on the staff.

VANEK SMITH: Oh, really?

BERNANKE: Yeah.

VANEK SMITH: Oh.

BERNANKE: And so there were a lot of folks there who I knew. And...

VANEK SMITH: Anyone who had gotten a bad grade?

BERNANKE: No, no, not those people.

VANEK SMITH: (Laughter).

Is the Fed less powerful than everybody thinks? I mean, is it...

BERNANKE: I don't know how powerful they think it is. I mean...

VANEK SMITH: (Laughter).

BERNANKE: The...

VANEK SMITH: I suppose it's relative.

BERNANKE: So monetary policy is a powerful tool, but it can only do certain things. You know, for example, people are concerned in the U.S. economy today about slow productivity growth; they're concerned about the distribution of income; they're concerned about the fact that participation rates among prime age workers are lower here than other countries - a lot of real problems in our economy. And the Fed with this one tool, monetary policy, I mean, really can't address those kinds of problems. So for a lot of the issues...

VANEK SMITH: It's a pretty big tool, though. I mean...

BERNANKE: Well, what it basically can do - first, it can try to keep inflation close to the Fed's target, which is - they've been pretty successful in doing.

VANEK SMITH: And what about the target inflation rate? - because I know you were trying to hit 2 percent. And during your term, you weren't able to hit it. That always confused me. Why - why weren't you able to hit it? It seems like you had all the - all the tools.

BERNANKE: The reason is that the main way in which the Fed affects inflation - or at least one of the main ways - is by getting the economy up to full employment so that the pressure on labor markets and on the economy tends to give extra impetus to wages and prices. That's the mechanism. So the Fed, in order to get inflation where it wants, it has basically had to get the economy back to where it wants it. And that's what's happening now. We're seeing the labor market close to full employment. We're starting to see some upward pressure on wages. And inflation is rising very slowly, very much in a controlled way. But it is now, you know, moving very slowly towards the 2 percent target that the Fed has set.

VANEK SMITH: Is there anything that you kind of keep your eye on now, something that you watch carefully as an economic indicator?

BERNANKE: Well, I watched - you know, I - my predecessor, Alan Greenspan, used to watch all kinds of interesting, obscure indicators.

VANEK SMITH: Oh, really?

BERNANKE: Yeah. Apparently, he would look at men's underwear sales...

VANEK SMITH: (Laughter).

BERNANKE: ...On the grounds...

VANEK SMITH: (Laughter).

BERNANKE: ...On the grounds that people don't buy new underwear when they're feeling economically strapped. So things like that...

VANEK SMITH: That's amazing.

BERNANKE: ...Obscure things.

VANEK SMITH: I mean, maybe true?

BERNANKE: Maybe true. I don't - I can't verify. But I'm more conventional. I no longer have all the Fed staff to help me anymore, so I'm more like a civilian than...

VANEK SMITH: Now when you pose a rhetorical question...

BERNANKE: Yeah.

VANEK SMITH: ...It just hangs out there.

BERNANKE: It doesn't - it just hangs out there completely unanswered.

VANEK SMITH: I mean, you were in maybe the toughest position during one of the toughest points in the U.S. economy. Is there anything that you miss about that time?

BERNANKE: Well, I am no longer at the Fed of course. And I enjoyed many things about the Fed - a lot of great people. It was really interesting to have so many smart economists around who could help me think about economic issues. But I surely wouldn't want to be in that kind of situation again, particularly, you know, with so much uncertainty and all the political blowback that we were getting. So I'm happy to be a civilian. I'm happy to be on the outside looking in, and I wish my successors the best of luck.

VANEK SMITH: We always love to hear what you think of the show. Send us an email - planetmoney@npr.org. Or you can find us on Twitter or Facebook. And if you're looking for something else to listen to, NPR's Pop Culture Happy Hour has just put together their annual preview of summer movies. They will tell you which films to catch this summer and which ones you can skip. You can find Pop Culture Happy Hour on the NPR One app or wherever you get your podcasts. Today's show was produced by Elizabeth Kulas. I'm Stacey Vanek Smith. Thanks for listening. Transcript provided by NPR, Copyright NPR.